tag:blogger.com,1999:blog-23225243850698370672024-02-19T06:42:25.321+02:00Eco+NomicsReproduction is authorised provided the source is acknowledged. Alex Botsis is responsible for all errors... You are invited to follow twitter.com/sir_alex89. Alex Botsishttp://www.blogger.com/profile/14393568466310479846noreply@blogger.comBlogger45125tag:blogger.com,1999:blog-2322524385069837067.post-21432054353731705082020-03-31T19:26:00.000+03:002020-03-31T19:27:26.982+03:00Why 2020 is different to the 2008 global financial crisis?<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="color: black; font-family: Georgia, Times New Roman, serif; line-height: 107%;">Following
the COVID-19 pandemic and the subsequent lockdown measures pursued by most
nations, economic activity has plummeted. US jobless claims (<a href="https://www.bbc.co.uk/news/business-52050426">link</a>) and UK universal
credit claims (<a href="https://www.ft.com/content/00bed2fe-6e92-11ea-9bca-bf503995cd6f">link</a>)
have reached unprecedented levels. These claims measure how many employees lose
their jobs. However, I argue below why this measure is not indicative of the length
of the economic downturn. Why is this crisis different than the most recent
sizeable downturn of 2008? Mainly for two reasons. Firstly, there is no credit
crunch for the time being. Secondly, the target of the government expenditure
is different.<o:p></o:p></span></div>
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<span style="font-family: Georgia, Times New Roman, serif;"><br /></span></div>
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<span style="color: black; font-family: Georgia, Times New Roman, serif; line-height: 107%;">Beginning
with the credit conditions, as opposed to 2008, banks still lend each other and
if they don’t the central banks will offer ample liquidity. Therefore, banks
can continue provide credit to the economy or at least they are not forced to completely
stop as in 2007-2008 following the collapse of the Lehman Brothers. The basic
function of credit is to transfer income from the future to the present. Households
and businesses can access credit to fund their immediate needs in cash for consumption
and for investment. This means consumption and investment expenditure might
slow down but not massively contract as more than a decade ago. <o:p></o:p></span></div>
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<span style="font-family: Georgia, Times New Roman, serif;"><br /></span></div>
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<span style="color: black; font-family: Georgia, Times New Roman, serif; line-height: 107%;">For
consumption and investment, the nature of the pandemic makes also a big difference.
We can expect firms to resume their operations as soon as the lockdown is over.
Worst case scenario, they will be operating at a pace a bit slower than that
before the lockdown. In 2008, firms were laying off employees because they were
shutting down for good and these jobs were “destroyed”. For the unemployed to
find a new job, new jobs and new firms needed to be created which takes time. Furthermore,
hiring back the recently laid off workers required additional investment expenditure
to create new jobs, but the unavailability of credit was delaying investment
and hence the recovery. In this pandemic, most of the jobs are not destroyed
completely but they are temporarily vacant. This is also why the surge in
unemployment claims is not informative this time. Also, note here, that the growth
predictions that are available for the rest of 2020 are heavily informed by the
jobless claims and by survey expectations which focus on the short term. Finally,
most of the households also anticipate their future income to recover as they expect
to get their jobs back, therefore they use their credit or savings to smoothen their
current consumption without cutting down their expenditure as much as in 2008.<o:p></o:p></span></div>
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<span style="font-family: Georgia, Times New Roman, serif;"><br /></span></div>
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<span style="color: black; font-family: Georgia, Times New Roman, serif; line-height: 107%;">What
additionally helps sustaining household expenditure is the government stimulus
packages (<a href="https://www.washingtonpost.com/world/europe/europe-seeks-to-limit-coronavirus-crisis-with-unprecedented-offers-to-pay-private-sector-salaries/2020/03/24/1f099a5a-6abe-11ea-b199-3a9799c54512_story.html">link</a>).
These stimulus packages in addition to the existing unemployment benefits will further
assist in maintaining expenditure and jobs. This will certainly increase public
debt, but the fiscal multiplier in combination with the zero interest rates will
act in accelerating economic growth more than the debt growth, so the debt-to-GDP
will recover in the medium term. And this is a very big difference with the fiscal
expansion of 2007-2008. Public debt increased then in order to fund bailouts
and recapitalizations which means that it did not have any effect in the real
economy. As soon as the financial sector was stabilized there was limited room
for further fiscal expansion and this prolonged and deteriorated the economic contraction.
<o:p></o:p></span></div>
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<span style="font-family: Georgia, Times New Roman, serif;"><br /></span></div>
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<span style="color: black; font-family: Georgia, Times New Roman, serif; line-height: 107%;">There
is however a cause for alarm and that is the Eurozone. Firstly, Europe’s
weakest economies, Spain and Italy, are being hit worst and having limited room
for fiscal stimulus. Because of their size, negative spill overs from these two
economies will be considerable especially for the Eurozone. Secondly, Europe’s zombie
banks, especially from Italy, will add further pressure. Thirdly, if Eurozone approaches
these threats as it did back in 2012, then they will face another more serious debt
crisis and a prolonged recession. <o:p></o:p></span></div>
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<span style="font-family: Georgia, Times New Roman, serif;"><br /></span></div>
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<span style="color: black; font-family: Georgia, Times New Roman, serif; line-height: 107%;">Regardless
the problems of the Eurozone, this pandemic is much different to the 2008 global
financial crisis. For the time being, there is no credit crunch, and the nature
of the increased government spending has positive economic effects. </span><o:p></o:p></div>
</div>
Alex Botsishttp://www.blogger.com/profile/14393568466310479846noreply@blogger.com0tag:blogger.com,1999:blog-2322524385069837067.post-26936520605324464742015-04-28T13:26:00.003+03:002015-04-28T13:34:27.510+03:00The myth of internal devaluation and of competitiveness after Grexit (also in Greek)<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-family: Georgia, Times New Roman, serif;">Perhaps, I am seeing things the wrong way, but here is my thought:</span></div>
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<span style="font-family: Georgia, Times New Roman, serif;"><br /></span></div>
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<span style="font-family: Georgia, Times New Roman, serif;">Following the <a href="https://www.imf.org/external/pubs/ft/scr/2014/cr14151.pdf">5th review of the IMF</a> and <a href="http://www.bankofgreece.gr/BogEkdoseis/Paper2011128.pdf">Athanasoglou (2011, Chart4, p.11) on "The role of product variety and </a><a href="http://www.bankofgreece.gr/BogEkdoseis/Paper2011128.pdf">quality and of domestic supply in foreign trade"</a> it is more than obvious that Greek firms are the largest importers. That is to say, Greece imports, heavily, factors of production other than labor.</span></div>
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<span style="font-family: Georgia, Times New Roman, serif;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: Georgia, Times New Roman, serif;">So, if Greece's non-labor production factors come from abroad, their prices are, also, set abroad... Therefore, the Greek firms may find it rather difficult to reduce their costs - no matter how labor cost might (?) be reduced - since the non-labor costs are set abroad. With firms finding difficult to reduce their costs, they will, subsequently, find it difficult to reduce their prices. This is a reason why prices did not deflate as wages did, so far, and why the the trade balance ameliorated mostly by the reduction of imports following the contraction of income and economic activity.</span></div>
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<span style="font-family: Georgia, Times New Roman, serif;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: Georgia, Times New Roman, serif;">Most likely, the overall mix, following the Greexit and the devaluation of the <i>New Drachma,</i> will be the following: reduced household income, higher prices and limited gains for competitiveness. </span></div>
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<span style="font-family: Georgia, Times New Roman, serif;"><br /></span></div>
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<span style="font-family: Georgia, Times New Roman, serif;"><u>Ο μύθος της εσωτερικής υποτίμησης και της ανταγωνιστικότητας μετά το Grexit:</u></span></div>
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<span style="font-family: Georgia, Times New Roman, serif;"><br /></span></div>
<span style="font-family: Georgia, Times New Roman, serif;">Ίσως, βλέπω κάτι με λάθος τρόπο, αλλά αυτή είναι η σκέψη μου:</span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif;">Σύμφωνα με την <a href="https://www.imf.org/external/pubs/ft/scr/2014/cr14151.pdf">5η Έκθεση του ΔΝΤ</a> και του <a href="http://www.bankofgreece.gr/BogEkdoseis/Paper2011128.pdf">Αθανάσογλου (2011, Chart4, σ.11) με θέμα "Ο ρόλος της ποικιλίας των προϊόντων και της ποιότητας και της εγχώριας προσφοράς στο εξωτερικό εμπόριο"</a> είναι περισσότερο από προφανές ότι οι ελληνικές επιχειρήσεις είναι οι κυριότεροι εισαγωγείς. Δηλαδή, η Ελλάδα εισάγει, σε μεγάλο βαθμό, συντελεστές παραγωγής πλην εργασίας.</span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif;">Έτσι, αν οι παραγωγικοί συντελεστές (πλην της εργασίας) στην Ελλάδα προέρχονται από το εξωτερικό, οι τιμές τους, επίσης, καθορίζονται στο εξωτερικό... Ως εκ τούτου, οι ελληνικές επιχειρήσεις θα δυσκολευτούν να μειώσουν το κόστος τους - παρά το πόσο θα μπορούσε (;) να μειωθεί το κόστος εργασίας - δεδομένου ότι η το μη μισθολογικό κόστος καθορίζεται στο εξωτερικό. Με τις επιχειρήσεις να δυσκολεύονται να μειώσουν το κόστος τους, θα δυσκολεύονται να μειώσουν και τις τιμές τους. Αυτός είναι και ένας λόγος για τον οποίο οι τιμές δεν ακολούθησαν την κατακρήμνιση των μισθών, και γιατί το εμπορικό ισοζύγιο βελτιώθηκε κυρίως από τη μείωση των εισαγωγών μετά την υποχώρηση του εισοδήματος και της οικονομικής δραστηριότητας.</span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif;"></span><br />
<span style="font-family: Georgia, Times New Roman, serif;">Το πιο πιθανό, λοιπόν, είναι ότι το συνολικό μείγμα, μετά το Greexit και την υποτίμηση της Νέας Δραχμής, θα είναι το ακόλουθο: μειωμένο εισόδημα των νοικοκυριών, υψηλότερες τιμές και περιορισμένα κέρδη σε ανταγωνιστικότητα.</span></div>
Alex Botsishttp://www.blogger.com/profile/14393568466310479846noreply@blogger.com0tag:blogger.com,1999:blog-2322524385069837067.post-3435099974031559892015-02-06T16:55:00.000+02:002015-02-06T17:36:30.534+02:00Greek Credit Institutions: Liquidity constrained?<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Georgia, Times New Roman, serif;">Been away for a while due to studying commitments...</span><br />
<span style="font-family: Georgia, Times New Roman, serif;">Following <a href="http://www.ecb.europa.eu/press/pr/date/2015/html/pr150204.en.html">the decision of the ECB about the eligibility of the Greek bonds</a>, I was initially panicked, too. However, after <a href="https://medium.com/bull-market/whats-going-on-with-the-ecb-and-greece-3821de717625">Karl Whelan's post</a> things got straight.</span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif;">Now that I, finally, have some time, I checked the </span><span style="font-family: Georgia, 'Times New Roman', serif;">balance sheets of the four largest </span><span style="font-family: Georgia, 'Times New Roman', serif;">Greek Banks, from the 3rd Quarter (September 30,2014), with respect to the eligibility of collateral for weekly ECB MROs. These are the results, as well the depositsthese Banks owe:</span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif;"><u>Piraeus Bank Group (in millions of Euros) (<a href="http://www.piraeusbankgroup.com/~/media/Com/Downloads/Investors/Financial-Results/9month2014/9M_Group_ENG.pdf">link</a>)</u></span><br />
<span style="font-family: Georgia, Times New Roman, serif;">Greek Sovereign Debt: 567.1 </span><br />
<span style="font-family: Georgia, Times New Roman, serif;">Other Countries Government debt: 358.5</span><br />
<span style="font-family: Georgia, Times New Roman, serif;">EFSF bonds and non- Greek IOUs: 14, 438.4</span><br />
<span style="font-family: Georgia, Times New Roman, serif;">Deposits (Liability): 54, 824</span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif;">On Sep. 30, 2014 the outstanding repo transactions - MRO, LTRO - with the Eurosystem (ECB & BoG) was 10 bn EUR; that is the Piraeus Banks had, at that time, absorbed liquidity of approx 10 bn from the Cebtral Bank - so, not that dependent after all.</span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif;"><u>Group of the National Bank of Greece (in millions of Euros) (<a href="https://www.nbg.gr/english/the-group/investor-relations/Documents/Financial%20Results%20Announcements/IFRS%20FS%2030%2009%202014%20EN.pdf">link</a>)</u></span><br />
<span style="font-family: Georgia, 'Times New Roman', serif;">Greek Sovereign Debt: 905</span><br />
<span style="font-family: Georgia, Times New Roman, serif;">EFSF bonds: 8, 677 </span><br />
<span style="font-family: Georgia, Times New Roman, serif;">Deposits: 66, 904</span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif;">Funding from the Eurosystem was 10.7 bn on </span><span style="font-family: Georgia, 'Times New Roman', serif;">Sep. 30, 2014</span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif;"><u>Eurobank Ergasias (in millions of Euros) (<a href="http://www.eurobank.gr/Uploads/pdf/INTERIM_REPORT_ENG_30.09.2014.pdf">link</a>)</u></span><br />
<span style="font-family: Georgia, 'Times New Roman', serif;">Greek Sovereign Debt: 5, 556</span><br />
<span style="font-family: Georgia, 'Times New Roman', serif;">EFSF bonds: 10, 088</span><br />
<span style="font-family: Georgia, 'Times New Roman', serif;">Deposits: 40, 458</span><br />
<span style="font-family: Georgia, 'Times New Roman', serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif;">Collateralized funding from the Eurosystem was 9,7 bn as of Sep. 30, 2014. </span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif;"><u>Alpha Bank (in millions of Euros) (<a href="http://www.alpha.gr/files/investorrelations/GROUP_IAS_Q3_2014_en.pdf">link</a>)</u></span><br />
<span style="font-family: Georgia, 'Times New Roman', serif;">Greek Sovereign Debt: </span><span style="font-family: Georgia, Times New Roman, serif;">3, 111.3</span><br />
<span style="font-family: Georgia, 'Times New Roman', serif;">EFSF bonds: 4, 300</span><br />
<span style="font-family: Georgia, 'Times New Roman', serif;">Deposits: 43, 077</span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif;">On Sep. 30, 2014, funding from the Eurosystem ("Term deposits" of "Central Banks") was 12.6 bn Euros.</span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif;">Finally, as far as the Asset-Backed securities Purchase Programme of the ECB is concerned, Greek Banks cannot participate with their mortgage loans (<a href="http://www.ecb.europa.eu/press/pr/date/2014/html/pr141002_1_Annex_1.pdf?c4144e9908c29df066a053246f81d1ff">see here</a>), with the exception of mortgage loans with the highest of the second-highest rating.</span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif;">Overall, the four systemic Greek Banks seem to have adequate collateral to access the ECB refinancing operations; ECB liquidity provision operations.</span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<i><span style="font-family: Georgia, Times New Roman, serif;">Note: Greek government debt owned is</span><span style="font-family: Georgia, 'Times New Roman', serif;">, perhaps,</span><span style="font-family: Georgia, 'Times New Roman', serif;"> that low because most of it has been sold as part of repos with the Eurosystem for refinancing purposes (MROs, LTROs).</span></i></div>
Alex Botsishttp://www.blogger.com/profile/14393568466310479846noreply@blogger.com0tag:blogger.com,1999:blog-2322524385069837067.post-30628424716483691582014-12-13T11:53:00.002+02:002014-12-13T11:53:46.682+02:00Monetizing Eurozone's Sovereign Debts: it is now or never<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Georgia, Times New Roman, serif;">So, Mario Draghi said that an inflation much lower than 2% is against his mandate. And it is! If you ask me, early 2015 is the right time, if not too late, to buy sovereign bonds. Let me, please, tell you what I think.</span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif;">First of all, given that Eurozone economy is below its potential, inflation risk will remain low, and the zero lower bound will prevent monetary policy to be "hazardously" inflationary. But, this is an argument why we should not fear of inflation, if the ECB decides to take bold action. True! For now...</span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif;">Moreover, given that we remain below our potential output, member states have begun to deviate from austerity and call for more expansionary budgets. Sooner or later, they will start creating budget deficits as a mean of expansion. And this has two implications. The first one, which relates to my previous argument is that budget deficits will boost expansion, and, hence, the return to the potential output. Therefore, the later the ECB decides to act, the more probable the inflation becomes. </span><span style="font-family: Georgia, 'Times New Roman', serif;">Following this scenario, should the member states decide to move to budget deficits, this will increase the cost of their funding. Especially for the periphery, the effect would be disproportionate to that in the rest of the Eurozone. So, an intervention of the ECB would lower this cost, and would make budget deficits, i.e. recocery, cheaper. In other words, ECB and Eurozeone members will share, so to speak, the costs of tackling deflation.</span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif;">Finally, monetizing sovereign debt without triggering hyperinflationary pressures would be ideal. Eurozone's overindebted economies will be able to take a breath, and continue with structural reforms without the necessity of more painful budget cuts. Structural reforms can be more easily pursued when economic activity flourishes.</span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif;">Overall, since member states will start diverging from the austerity dogma, ECB will have to act before its policy risks becoming inflationary, to make budget deficits cheaper, to reduce debt burden, and to make structural reforms easier. All while tackling deflation as its mandate demands.</span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif;">P.S.: Real GDP of the US (red line) and the Eurozone (blue line) in the following graph; yet another reason why bold action is needed...</span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
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<a href="http://research.stlouisfed.org/fredgraph.jpg?hires=1&type=image/jpeg&chart_type=line&recession_bars=off&log_scales=&bgcolor=%23e1e9f0&graph_bgcolor=%23ffffff&fo=verdana&ts=12&tts=12&txtcolor=%23444444&show_legend=yes&show_axis_titles=yes&drp=0&cosd=1999-10-26%2C1999-10-26&coed=2014-02-14%2C2014-02-14&width=670&height=445&stacking=&range=Custom&mode=fred&id=NAEXKP01EZQ652S%2CGDPC1&transformation=nbd%2Cnbd&nd=2009-06-01%2C2009-06-01&ost=-99999%2C-99999&oet=99999%2C99999&scale=left%2Cleft&line_color=%234572a7%2C%23aa4643&line_style=solid%2Csolid&lw=2%2C2&mark_type=none%2C&mw=1%2C1&mma=0%2C0&fml=a%2Ca&fgst=lin%2Clin&fq=Quarterly%2CQuarterly&fam=avg%2Cavg&vintage_date=%2C&revision_date=%2C" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://research.stlouisfed.org/fredgraph.jpg?hires=1&type=image/jpeg&chart_type=line&recession_bars=off&log_scales=&bgcolor=%23e1e9f0&graph_bgcolor=%23ffffff&fo=verdana&ts=12&tts=12&txtcolor=%23444444&show_legend=yes&show_axis_titles=yes&drp=0&cosd=1999-10-26%2C1999-10-26&coed=2014-02-14%2C2014-02-14&width=670&height=445&stacking=&range=Custom&mode=fred&id=NAEXKP01EZQ652S%2CGDPC1&transformation=nbd%2Cnbd&nd=2009-06-01%2C2009-06-01&ost=-99999%2C-99999&oet=99999%2C99999&scale=left%2Cleft&line_color=%234572a7%2C%23aa4643&line_style=solid%2Csolid&lw=2%2C2&mark_type=none%2C&mw=1%2C1&mma=0%2C0&fml=a%2Ca&fgst=lin%2Clin&fq=Quarterly%2CQuarterly&fam=avg%2Cavg&vintage_date=%2C&revision_date=%2C" height="424" width="640" /></a></div>
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Alex Botsishttp://www.blogger.com/profile/14393568466310479846noreply@blogger.com0tag:blogger.com,1999:blog-2322524385069837067.post-12376897486965423102014-12-08T21:07:00.000+02:002014-12-08T21:24:01.961+02:00"Asset inflation" aka a transmission channel<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Georgia, Times New Roman, serif;">Asset values have been rising somehow intensively, following amid liquidity injection (QE) by major Central Banks over the last few years. A controversial, yet rather effective, policy choice. And this controversy, currently, derives from the asset bubble argument. In other words, the increase in the value of assets is a bubble, and, inevitably, it will burst. Is this policy controversy well justified? Perhaps, not very well.</span><br />
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<a href="http://research.stlouisfed.org/fredgraph.jpg?hires=1&type=image/jpeg&chart_type=line&recession_bars=on&log_scales=&bgcolor=%23e1e9f0&graph_bgcolor=%23ffffff&fo=verdana&ts=12&tts=12&txtcolor=%23444444&show_legend=yes&show_axis_titles=yes&drp=0&cosd=1990-04-23%2C1990-04-23&coed=2014-03-31%2C2014-03-31&width=670&height=445&stacking=&range=Custom&mode=fred&id=TFAABSHNO%2CNCBTFTQ027S&transformation=nbd%2Cnbd&nd=2009-06-01%2C2009-06-01&ost=-99999%2C-99999&oet=99999%2C99999&scale=left%2Cleft&line_color=%234572a7%2C%23aa4643&line_style=solid%2Csolid&lw=2%2C2&mark_type=none%2C&mw=1%2C1&mma=0%2C0&fml=a%2Ca&fgst=lin%2Clin&fq=Quarterly%2C+End+of+Period%2CQuarterly&fam=avg%2Cavg&vintage_date=%2C&revision_date=%2C" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://research.stlouisfed.org/fredgraph.jpg?hires=1&type=image/jpeg&chart_type=line&recession_bars=on&log_scales=&bgcolor=%23e1e9f0&graph_bgcolor=%23ffffff&fo=verdana&ts=12&tts=12&txtcolor=%23444444&show_legend=yes&show_axis_titles=yes&drp=0&cosd=1990-04-23%2C1990-04-23&coed=2014-03-31%2C2014-03-31&width=670&height=445&stacking=&range=Custom&mode=fred&id=TFAABSHNO%2CNCBTFTQ027S&transformation=nbd%2Cnbd&nd=2009-06-01%2C2009-06-01&ost=-99999%2C-99999&oet=99999%2C99999&scale=left%2Cleft&line_color=%234572a7%2C%23aa4643&line_style=solid%2Csolid&lw=2%2C2&mark_type=none%2C&mw=1%2C1&mma=0%2C0&fml=a%2Ca&fgst=lin%2Clin&fq=Quarterly%2C+End+of+Period%2CQuarterly&fam=avg%2Cavg&vintage_date=%2C&revision_date=%2C" height="424" width="640" /></a></div>
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<span style="font-family: Georgia, Times New Roman, serif;">I will not argue whether asset inflation is a bubble or not. That is not the point I am trying to make. </span><span style="font-family: Georgia, 'Times New Roman', serif;">I will argue, however, that the rising asset values is exactly how the whole policy should work! It is a key mechanism of transmitting monetary policy to the real economy. Not only for banks, but for households, as well. If you own assets, their value rises your net value rises, too, and, hence, you can borrow more or/and at a lower cost. Most importantly, households and businesses can remain solvent while deleveraging stops, and their liabilities rise.</span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">However, there are a few shortcomings. Firstly, increasing asset value may indicate a broken transmission mechanism; cheap liquidity is used for stock purchases instead of financing consumption and investment through lending. Again, that is also good; asset value rises, increasing net worth etc. Even if the transmission channel was malfunctioning, the above stagnation price and GDP growth, in the US, suggest that this channel has recovered and is working. </span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">Secondly, what happens if the value these assets starts deflating. Most likely, a correction will take place but I believe that central banks will intervene, once more, to contain it! And they must do so, or else we will get back to 2008. If central bankers react in time, not too late, they will be able to limit the asset deflation, and its consequences.</span><span style="font-family: Georgia, 'Times New Roman', serif;">Should they? Definitely, yes! One has to end what he begins. Central banks started some unconventional policy, and, subsequently, they will have to end it unconventionally. Nevertheless, stocks in the US keep rising despite the end of QE...</span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">All in all, this controversy over QE and the day after it, has some valid grounds, but waiting for the Armageddon has not. For the US, price inflation is good, growth is good, end of QE cannot go bad, so don't worry too much, please. This is how it is supposed to work, this is how it worked.</span></div>
Alex Botsishttp://www.blogger.com/profile/14393568466310479846noreply@blogger.com0tag:blogger.com,1999:blog-2322524385069837067.post-81280931430286820792014-10-24T13:15:00.000+03:002014-10-24T13:15:23.597+03:00Andiamo, Italiani!<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Georgia, Times New Roman, serif;">While French Hollande is ready to negotiate for pro-austerity, "fiscal consolidation" if you will, others take serious steps for the best of the entire Eurozone's interest.</span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">Mario Draghi is (claims to be) ready to take bold action against deflation threat</span><span style="font-family: Georgia, 'Times New Roman', serif;"> (</span><a href="http://uk.reuters.com/article/2014/10/23/uk-ecb-germany-insight-idUKKCN0IC1U720141023" style="font-family: Georgia, 'Times New Roman', serif;">Reuters</a><span style="font-family: Georgia, 'Times New Roman', serif;">),</span><span style="font-family: Georgia, 'Times New Roman', serif;"> and Matteo Renzi publicly denouncing budget cuts in a recessionary environment (<a href="http://www.huffingtonpost.fr/2014/10/24/matteo-renzi-menace-commission-europeene-budget-austerite_n_6039778.html?utm_hp_ref=france#">Le H</a></span><span style="font-family: Georgia, Times New Roman, serif;"><a href="http://www.huffingtonpost.fr/2014/10/24/matteo-renzi-menace-commission-europeene-budget-austerite_n_6039778.html?utm_hp_ref=france#">uffington Post</a>). Both are in the trenches with Berlin.</span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">At the same time, the rest of the leaders are conspicuous by their absence. I do not know anything about politics, but while the "fiscally sound" Eurozone failed to ram unemployment, an actual human index, the US did far more better job. The "cost" of fully recovering from recession was an approximately 9% of GDP additional debt burden for the US.</span><br />
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<a href="http://research.stlouisfed.org/fredgraph.jpg?hires=1&type=image/jpeg&chart_type=line&recession_bars=on&log_scales=&bgcolor=%23e1e9f0&graph_bgcolor=%23ffffff&fo=verdana&ts=12&tts=12&txtcolor=%23444444&show_legend=yes&show_axis_titles=yes&drp=0&cosd=2006-12-28%2C2006-12-28&coed=2013-10-01%2C2013-10-01&width=670&height=445&stacking=&range=Custom&mode=fred&id=NAEXKP01USQ652S%2CNAEXKP01EZQ652S&transformation=nbd%2Cnbd&nd=2007-01-01%2C2007-01-01&ost=-99999%2C-99999&oet=99999%2C99999&scale=left%2Cleft&line_color=%234572a7%2C%23aa4643&line_style=solid%2Csolid&lw=2%2C2&mark_type=none%2C&mw=1%2C1&mma=0%2C0&fml=a%2Ca&fgst=lin%2Clin&fq=Quarterly%2CQuarterly&fam=avg%2Cavg&vintage_date=%2C&revision_date=%2C" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://research.stlouisfed.org/fredgraph.jpg?hires=1&type=image/jpeg&chart_type=line&recession_bars=on&log_scales=&bgcolor=%23e1e9f0&graph_bgcolor=%23ffffff&fo=verdana&ts=12&tts=12&txtcolor=%23444444&show_legend=yes&show_axis_titles=yes&drp=0&cosd=2006-12-28%2C2006-12-28&coed=2013-10-01%2C2013-10-01&width=670&height=445&stacking=&range=Custom&mode=fred&id=NAEXKP01USQ652S%2CNAEXKP01EZQ652S&transformation=nbd%2Cnbd&nd=2007-01-01%2C2007-01-01&ost=-99999%2C-99999&oet=99999%2C99999&scale=left%2Cleft&line_color=%234572a7%2C%23aa4643&line_style=solid%2Csolid&lw=2%2C2&mark_type=none%2C&mw=1%2C1&mma=0%2C0&fml=a%2Ca&fgst=lin%2Clin&fq=Quarterly%2CQuarterly&fam=avg%2Cavg&vintage_date=%2C&revision_date=%2C" height="424" width="640" /></a></div>
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<span style="font-family: Georgia, Times New Roman, serif;">Hopefully, Euro leaders will realize that unemployment is far more important than fiscal soundness, before it's too late!</span></div>
Alex Botsishttp://www.blogger.com/profile/14393568466310479846noreply@blogger.com0tag:blogger.com,1999:blog-2322524385069837067.post-84664321313342727842014-10-15T22:46:00.002+03:002014-10-15T22:47:42.099+03:00The failing "success story"...<div dir="ltr" style="text-align: left;" trbidi="on">
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<a href="https://m1.behance.net/rendition/modules/83933667/disp/ccd5752a96a582a99d5ec69ccacb1b66.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://m1.behance.net/rendition/modules/83933667/disp/ccd5752a96a582a99d5ec69ccacb1b66.jpg" /></a></div>
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<span style="font-family: Georgia, Times New Roman, serif;">We reed at Reuters that <a href="http://uk.reuters.com/article/2014/10/15/uk-markets-bonds-euro-idUKKCN0I41XW20141015">"Greek stocks plummet as bond yield surge threatens bailout exit"</a>! The over optimism of the Greek government turned out to be a huge bomb they have been playing with for a very long time. Perhaps, in an attempt to shape expectations, or to tame the animal spirits... </span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">Anyway, as <a href="http://ecoplusnomics.blogspot.gr/2014/04/greeces-exit-to-market-few-numbers.html">I wrote a few months earlier</a> the borrowing cost was, is and will remain</span><span style="font-family: Georgia, 'Times New Roman', serif;"> </span><span style="font-family: Georgia, 'Times New Roman', serif;">prohibitive</span><span style="font-family: Georgia, 'Times New Roman', serif;"> for a very long time. Until we raise adequate budget surpluses to finance our debt obligations, including annual interest payments, we cannot cut all ties with the IMF. Why particularly the IMF? Because, our Euro partners will find it hard to convince their tax payers to fund us even more, and the markets know that. </span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">Added to the enormous borrowing cost, considerable political unrest is about to unveil. Naturally, after almost five years of continuous social turmoil - increasing unemployment, poverty, social exclusion, income losses - it would be naive to expect political stability.</span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">If you ask me, I do not believe that we are going to roll back; its the over optimism that will be cracked down by the markets. So, if you were one of those expecting a much better 2015, please, reconsider. Hopefully, it will be a little better... Deflation from abroad will shadow any higher growth momentum.</span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">P.S.: You may read the "Recent Developments" section (paragraphs 4 to 13) of the <a href="https://www.imf.org/external/pubs/ft/scr/2014/cr14151.pdf">"Fifth Review"</a> of the IMF, and judge by yourselves how "over" the over optimism has been. More about "Greece and the IMF" <a href="https://www.imf.org/external/country/grc/">here</a>.</span><br />
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Alex Botsishttp://www.blogger.com/profile/14393568466310479846noreply@blogger.com0tag:blogger.com,1999:blog-2322524385069837067.post-40786361769536010592014-08-20T22:26:00.001+03:002014-08-26T14:48:18.784+03:00Preliminary Macro: Rising Euro-zone Trade Surplus is Good or Bad News?<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="background-color: white; font-family: Georgia, Times New Roman, serif;"><span style="line-height: 18.200000762939453px;">Reading "</span><a href="http://uk.reuters.com/article/2014/08/18/uk-eurozone-economy-trade-idUKKBN0GI1CM20140818" style="color: #1155cc; line-height: 18.200000762939453px;" target="_blank">Euro zone trade surplus rises more than expected in June</a><span style="line-height: 18.200000762939453px;">" in <a href="http://uk.reuters.com/" style="color: #1155cc;" target="_blank">uk.reuters.com</a>, we may feel either happy or concerned or indifferent. Since the trade surplus has, per definitionem, two branches; the imports and the exports, one has to check both of them in order to make and assessment. For that purpose, the latest relevant </span><span style="line-height: 18.200000762939453px;">Eurostat News Release (ENR) can</span><span style="line-height: 18.200000762939453px;"> be found <a href="http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/6-18082014-AP/EN/6-18082014-AP-EN.PDF" style="color: #1155cc;" target="_blank">here</a>.</span></span><br />
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<span style="font-family: Georgia, Times New Roman, serif;"><span style="line-height: 18.200000762939453px;">In this ENR we observe that the </span><span style="line-height: 18.200000762939453px;">growth of exports (non seasonally adjusted) </span><span style="line-height: 18.200000762939453px;">was really sluggish as compared to the more vigorous rise of imports, </span><span style="line-height: 18.200000762939453px;">for the 18-membered Euro Area</span><span style="line-height: 18.200000762939453px;"> over the first semester of 2014. This might be a result of the weakening Euro of the second quarter, following the deflation concerns. By checking the seasonally adjusted data we see that imports have shown some month-to-month growth signs lately (<a href="http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/6-16082013-BP/EN/6-16082013-BP-EN.PDF">feel free to compare it with 2013</a>). If we take under consideration the dwindling Euro-zone inflation compared to the more vivid evolution of prices in the rest of the globe, we can assert that the growth of imports is opposing to what price and exchange rate developments dictate, that is a halt or a contraction of imports. That is a sign of a weak but not (yet?) contracting domestic demand, lowering the risk of a severe recession-deflation.</span></span></span><br />
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjxqrGck4DBLsELvC5zwxLEflEmd5X9HksKxvceGyw0H633CJfDAmA9jjyys66fy1HaOS_MfaUhcutKneGYCVTx_duvYFHuptSDXD-NKacCPMbkurL7J_x7aR3ePKX92RIVWh8I465EtFw/s1600/GDP_EUA18-28_US.png" imageanchor="1" style="background-color: white; margin-left: auto; margin-right: auto;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjxqrGck4DBLsELvC5zwxLEflEmd5X9HksKxvceGyw0H633CJfDAmA9jjyys66fy1HaOS_MfaUhcutKneGYCVTx_duvYFHuptSDXD-NKacCPMbkurL7J_x7aR3ePKX92RIVWh8I465EtFw/s1600/GDP_EUA18-28_US.png" height="334" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="background-color: white;"><span style="font-family: Georgia, 'Times New Roman', serif; line-height: 18.200000762939453px;">Source: Eurostat, </span><a href="http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-14082014-AP/EN/2-14082014-AP-EN.PDF" style="color: #1155cc; font-family: Georgia, 'Times New Roman', serif; line-height: 18.200000762939453px;" target="_blank">http://epp.eurostat.<wbr></wbr>ec.europa.eu/cache/ITY_PUBLIC/<wbr></wbr>2-14082014-AP/EN/2-14082014-<wbr></wbr>AP-EN.PDF</a><span style="font-family: Georgia, 'Times New Roman', serif; line-height: 18.200000762939453px; text-align: left;"><br /></span></span></td></tr>
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<span style="background-color: white;"><span style="font-family: Georgia, 'Times New Roman', serif; line-height: 18.200000762939453px;">So, the increased trade surplus simply shows that in the Eurozone we are slowing down but not shrinking, while the rest of the world is certainly doing better. That is, actually, good news</span><span style="font-family: Georgia, 'Times New Roman', serif; line-height: 18.200000762939453px;">! However, the geopolitical risks lurking in Ukraine and in Russia - West trade relations can turn the Block upside down.</span><span style="font-family: Georgia, 'Times New Roman', serif; line-height: 18.200000762939453px;"> </span></span><br />
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<span style="background-color: white; font-family: Georgia, 'Times New Roman', serif;">P.S.: Austerity and "structural reforms" cannot be labeled as "successful" in enhancing trade surplus since this latest uptrend is most likely attributed to the depressed economy (recession is imminent, if you ask me, the third one in the last 6 years) and to the adverse price developments that are undermining the Euro. However, if the ongoing policy mix remains effective for a long time, then we will have moved to the long run and, hence, the "structural reforms" will have long run effects with the unbearable cost of exceptionally high long run unemployment.</span></div>
<span style="background-color: black;"><img height="1" src="https://blogger.googleusercontent.com/img/proxy/AVvXsEgj5oWeLhVI0tVkP1INSpyCsNP9vUdEr1z-KbeZr9vQz0Y9oDp0Owj-R1ZjU-amYb8enfe9Q2kQI7iTkPnhZ7i4Ut11PzbeaCDpZOUruILQR3ORw0ubKikG6_vmGuochvtcgIavLtv7YT6t3KhowXzaMkOFnSDxilH4HE45P0QKlIxvcZ92UcZarP6Pgr_EYyWbInfQmsXsR2XhEH2j6kO0MmTg=s0-d-e1-ft&utm_medium=email" width="1" /></span></div>
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Alex Botsishttp://www.blogger.com/profile/14393568466310479846noreply@blogger.com0tag:blogger.com,1999:blog-2322524385069837067.post-71370927583264039412014-08-09T15:57:00.002+03:002014-08-09T15:57:30.850+03:00Russia embargoes "Made in West" food - Deflationary and unemployment pressures?<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-family: Georgia, Times New Roman, serif;">European Union's "Food and Live Animals" (SITC01) exports to Russia in 2013 accounted for some more than 7.3% of the block's flows towards this trade partner (see<a href="http://trade.ec.europa.eu/doclib/html/113440.htm"> European Commission Trade Statistics with Russia</a>), and were of approximately 8.6bn Euros gross value. Not outstanding in aggregate, but in industry level whose total exports had a value of approximately 75.3 bn Euros (see <a href="http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_122532.pdf">European Commission Trade Statistics with the World</a>), gross, it is something.</span></div>
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgiYX7zd3wGLf2e1oTTWzFzCrAfgkxUbEaHg5HXGS1fzONG_lwvcAvU3993TMBp6sUSBvYTKI_7-kaWCdZgyIubyjbNhXxp38me9pGnpA4lpRaG1gL2cAZrVLY-gBJh2bXm73SNwbeA-bQ/s1600/eurozone_eurocoin.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgiYX7zd3wGLf2e1oTTWzFzCrAfgkxUbEaHg5HXGS1fzONG_lwvcAvU3993TMBp6sUSBvYTKI_7-kaWCdZgyIubyjbNhXxp38me9pGnpA4lpRaG1gL2cAZrVLY-gBJh2bXm73SNwbeA-bQ/s1600/eurozone_eurocoin.jpg" height="360" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-family: Georgia, Times New Roman, serif; font-size: x-small;">Image Source: http://www.tradeandexportme.com/2013/12/eurozone-inflation-rises-in-november/</span></td></tr>
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<span style="font-family: Georgia, 'Times New Roman', serif;">What does this mean for the inflation? It is simple! SITC01 firms of the Eurozone will have to cut their prices to boost the demand of their undisposed goods in the interior and in other trade partners. Should this scenario be realized, it will add further downward price pressure in the already fragile price and product developments of the Monetary Union.</span></div>
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<span style="font-family: Georgia, Times New Roman, serif;">On the other hand, the SITC01 firms might seek to limit their production as a response to a lower demand, which will consequently limit the workforce they employ.</span></div>
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<span style="font-family: Georgia, Times New Roman, serif;">At the moment most of the Eurozone firms of this sector are in this "mood": cutting prices, and cutting (or not creating) jobs, as it is shown by HICP and unemployment statistics. Therefore, in what way the involved firms and producers will react, it remains to be seen... </span></div>
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Alex Botsishttp://www.blogger.com/profile/14393568466310479846noreply@blogger.com0tag:blogger.com,1999:blog-2322524385069837067.post-6914842110834054862014-05-20T12:09:00.000+03:002014-05-20T12:13:17.719+03:00No Supply-Demand laws for the Public Debt markets?<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Georgia, Times New Roman, serif;">There is some concern about the anticipated QE from the ECB, with respect to the public debt yields (e.g. <a href="http://uk.reuters.com/article/2014/05/19/uk-eurozone-bonds-ecb-idUKKBN0DZ0XP20140519">Reuters article</a>). In other words, there is some widespread (?) concern that Eurozone bond yields will rise due to higher inflation expectations following the highly awaited intervention of the ECB. Expectations matter, but what about the Supply & Demand Laws?</span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">If we take under consideration the vast shift in the demand for bonds, their price will move upwards and, hence, their yields will fall.</span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">This is what happened in the US following each QE.</span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">So, inflation has been firmly tamed and both long-term and short-term Government debt yiels have decreased. </span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif;">Is there any case with monetary expansion accompanied with increases in Government's cost of borrowing while GDP being way off course?</span><br />
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Alex Botsishttp://www.blogger.com/profile/14393568466310479846noreply@blogger.com0tag:blogger.com,1999:blog-2322524385069837067.post-53804351891707285122014-04-10T14:49:00.003+03:002014-04-10T14:57:53.276+03:00Greece's Bond Market Return: A few numbers.<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Georgia, Times New Roman, serif;">I will only refer to a few facts; no conclusions, no comments at all. </span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif;">In 2010 the Greek Government issued 5-YR bonds yielding 6.1% (<a href="http://www.naftemporiki.gr/finance/story/792620/prosfores-ano-ton-20-dis-gia-to-5etes-sto-495-to-epitokio">Naftemporiki</a>), while HICP annual rate change was 4.7% (EUROSTAT), and that of CPI was 5.1% (EL.STAT.).</span><br />
<span style="font-family: Georgia, Times New Roman, serif;">Currently, the cost of the 5-YR borrowing is 4.95% and price developments are expected to remain near zero for 2014 (-0.9% for HICP and -1.7% for CPI; negative in 2013).</span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">In addition, since the coupon rate is 4.75% (<a href="http://www.bloomberg.com/news/2014-04-10/greece-readies-bond-sale-as-athens-car-bomb-reminds-of-upheaval.html">Bloomberg</a>) the Government budget shall incur some 142.5mn € (0.0475*3bn €) of additional annual interest payments for the next five years.</span><br />
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<span style="font-family: Georgia, 'Times New Roman', serif;">That's all folks!</span><br />
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Alex Botsishttp://www.blogger.com/profile/14393568466310479846noreply@blogger.com0tag:blogger.com,1999:blog-2322524385069837067.post-7009471576038288992014-03-18T23:53:00.001+02:002014-03-18T23:53:05.943+02:00Peace... like prosperity?<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Georgia, Times New Roman, serif;">Arab Spring, Syria and now in Europe's threshold; Ukraine...</span><br />
<span style="font-family: Georgia, Times New Roman, serif;">A thought of mine: perhaps we should not take peace and security for granted as we did for our heyday before 2007.</span><br />
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<span style="font-family: Georgia, 'Times New Roman', serif;">Remember the 2012 Nobel Peace Prize? What an irony...</span><br />
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Alex Botsishttp://www.blogger.com/profile/14393568466310479846noreply@blogger.com0tag:blogger.com,1999:blog-2322524385069837067.post-86121625526054419842014-02-24T22:24:00.000+02:002015-02-13T12:43:39.545+02:00Deflation: An Intermediate Exercise<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-family: Georgia, Times New Roman, serif;">There is much talking about deflation lately in both sides of the Atlantic. How probable deflation is? How did we get to worry about negative price developments while last year some economists (fortunately, not too many) were arguing for the risk of high inflation as a result of the expansionary monetary policy? </span></div>
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<span style="font-family: Georgia, Times New Roman, serif;">10 months ago Paul Krugman was looking for the "<a href="http://krugman.blogs.nytimes.com/2013/04/13/missing-deflation/" target="_blank">Missing Deflation</a>", and I made <a href="http://ecoplusnomics.blogspot.gr/2013/04/deflation-why-it-is-not-happening.html" target="_blank">an attempt</a> (with some mistakes...) to find it. Currently, energy cost evolution is weak (Eurostat) and growth in the EMU remains feeble, while the US are getting better.</span></div>
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<span style="font-family: Georgia, 'Times New Roman', serif;">I will attempt to explain the recent deflationary pressure through a Medium term Aggregate Demand - M/term Aggregate Supply (AD-AS). In Figure 1, economy's midterm equilibrium is at point A, where AD and AS intersect over the Full Employment locus- that was back in 2007. The negative aggregate demand shock following the Great Recession of 2008 is represented by the shift of AD to AD', where the expected price level, Pe (intersection of AS and Potential Output), is greater than medium-term realized price level, P* (</span><span style="font-family: Georgia, 'Times New Roman', serif;">intersection of AS and AD'). AS curve gradually adjusts, moving towards point A'. That is where things become different for the US and the EMU.</span><br />
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<tr><td class="tr-caption" style="text-align: center;"><span style="font-family: Georgia, Times New Roman, serif; font-size: small;"><b>Figure 1</b></span></td></tr>
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<span style="font-family: Georgia, 'Times New Roman', serif;"><br /></span>
<span style="font-family: Georgia, 'Times New Roman', serif;">EMU: In Figure 2 we observe the faint growth rates, which means that AD' has remained below the pre-2008 level for the entire medium-term horizon, giving enough time to AS to adjust, ultimately leading to a lower price level - i.e. deflation. The policy mixture in the Eurozone: austerity for most countries and fairly expansionary monetary policy.</span><br />
<span style="font-family: Georgia, 'Times New Roman', serif;">US: Persistently higher growth rates have allowed AD to recover closer to its pre-2008 level, preventing strong negative price adjustment to take place. The policy mixture in the US: aggressively expansionary monetary policy and budget deficits- however, the letter has decreased more than a half over the last two years, from 8.4% of GDP in 2011 to 4.1% in 2013 (<a href="http://www.cbo.gov/sites/default/files/cbofiles/attachments/HistoricalBudgetData.xlsx">cbo.gov</a>).</span><br />
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRxvOF3dSUYph4G37RUsHY-q3E8GOH3exAvDDGauMfAC6SoFK-NkhBroRM0X9JbXBt4biVkRAsLbvYfHiJg50g1orP9S7yGADxY4LP94VW9ayg1Ry1K-dc0STlBFFlfSRfDjk5tJYI2Qs/s1600/EMU_USgrowth.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRxvOF3dSUYph4G37RUsHY-q3E8GOH3exAvDDGauMfAC6SoFK-NkhBroRM0X9JbXBt4biVkRAsLbvYfHiJg50g1orP9S7yGADxY4LP94VW9ayg1Ry1K-dc0STlBFFlfSRfDjk5tJYI2Qs/s1600/EMU_USgrowth.png" height="496" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-family: Georgia, Times New Roman, serif; font-size: small;"><b>Figure 2</b></span></td></tr>
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<span style="font-family: Georgia, Times New Roman, serif;">Overall, it is safe to conclude that the deflation risk has nothing surprising in it, as far as the EMU is concerned. On the other hand, the risk for the US is very low. </span></div>
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<span style="font-family: Georgia, Times New Roman, serif;">While we are waiting for the ECB to take action, let us see what we can expect from our central bank. AD curve of the medium-run is determined by the IS-LM framework of the short run. In 2008 IS shifted to IS', leading to a lower product, while LM gradually moved to </span><span style="font-family: Georgia, 'Times New Roman', serif;">LM' -</span><span style="font-family: Georgia, 'Times New Roman', serif;"> the zero lower bound, a liquidity trap. Again two different cases for he EMU and the US.</span><br />
<span style="font-family: Georgia, 'Times New Roman', serif;"><br /></span>
<span style="font-family: Georgia, 'Times New Roman', serif;">EMU: Eurozone economic activity has remained close to IS' (due to the policy mixture aforementioned) for a long period - the problem extended to the medium term - and ECB monetary policy is very close (if not in) to the zero lower bound. Any QE will have very little if any effect in shifting IS' towards IS for two reasons. Firstly, any shift from LM' to LM'' will not affect the interest rate since LM curve of the ECB is practically flat. Secondly, interest rates </span><span style="font-family: Georgia, 'Times New Roman', serif;">(both expected and realized)</span><span style="font-family: Georgia, 'Times New Roman', serif;"> </span><span style="font-family: Georgia, 'Times New Roman', serif;">abroad are also close to zero and we should not expect any depreciation to enhance exports even more. Therefore, under the ongoing state of affairs IS' will keep recovering towards IS at a slow pace, and, hence, AD' will remain well below 2008 level over the medium term; price level will keep decreasing. Only shifts of the IS can increase product at a higher rate to halt further negative price adjustments.</span><br />
<span style="font-family: Georgia, 'Times New Roman', serif;">US: Economic activity recovered at a faster pace than in the Eurozone, and AD did not remained for too long far from the pre-2008 level. Monetary policy remains, also, ineffective. </span><br />
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjxGakJ0xuE0JEc3yWV2HSkXMnKY6Bm4Y-rcT9iYJAKE3lMdxRAjEii1EavmgYfyacuzbehWLAQHfqZz4rXOEDknWK_ZTfIjCijhvriK-zYShB6Mk6-Nw5BJHBwJJbcDPR7AEJ-DH0FBBo/s1600/IS-LM.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjxGakJ0xuE0JEc3yWV2HSkXMnKY6Bm4Y-rcT9iYJAKE3lMdxRAjEii1EavmgYfyacuzbehWLAQHfqZz4rXOEDknWK_ZTfIjCijhvriK-zYShB6Mk6-Nw5BJHBwJJbcDPR7AEJ-DH0FBBo/s1600/IS-LM.png" height="430" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-family: Georgia, Times New Roman, serif; font-size: small;"><b>Figure 3</b></span></td></tr>
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<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif;">In conclusion, deflation is more likely to appear in the Eurozone than in the US, and any ECB action will find it difficult to tame the inimical price developments. Intermediate Macroeconomics models are not that bad in the end, are they?</span><span style="font-family: Georgia, Times New Roman, serif;"></span><br />
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<span style="font-family: Georgia, Times New Roman, serif;"><i>For more on IS-LM (Mundell-Fleming) and AS-AD frameworks (These are my references, as well - Errors, naturally, mine):</i></span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><i>[1] <a href="http://ocw.mit.edu/courses/economics/14-02-principles-of-macroeconomics-fall-2009/lecture-notes/"><span style="color: black;">http://ocw.mit.edu/courses/economics/14-02-principles-of-macroeconomics-fall-2009/lecture-notes/</span></a></i></span><br />
<i><span style="font-family: Georgia, Times New Roman, serif;"></span></i></div>
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<span style="font-family: Georgia, Times New Roman, serif;"><i>[2] Blanchard, O. and Johnson, D. R. (2013): "Macroeconomics". Pearson. 6th Edition.</i></span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><i>[3] Burda, M. and Wyplosz, C. (2009): "Macroeconomics: A European Text". Oxford UP. 6th Edition.</i></span><br />
<i style="font-family: Georgia, 'Times New Roman', serif;">And in many more...</i></div>
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<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif;">*Updated graphs on Febr. 13, 2015. They had gone missing...</span></div>
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Alex Botsishttp://www.blogger.com/profile/14393568466310479846noreply@blogger.com0tag:blogger.com,1999:blog-2322524385069837067.post-4802336926109776682014-02-06T12:09:00.000+02:002014-02-06T12:18:00.592+02:00ECB Day: Coup de théâtre?<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Georgia, Times New Roman, serif;">ECB board members meet today. As shown in the following graphs overnight interbank rate (EONIA, 1st graph*) presents great volatility upon Emerging Economies' capital outflows, Eurozone inflation declines (blue line, 2nd graph*), and <a href="http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/" target="_blank">recent developments</a> do not leave much space for optimism. </span><br />
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<a href="http://4.bp.blogspot.com/-iciL9OQKcow/UvNQdV8dJyI/AAAAAAAAAYc/gfmAcT1gs9U/s1600/00EONIA.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: Georgia, Times New Roman, serif;"><img border="0" src="http://4.bp.blogspot.com/-iciL9OQKcow/UvNQdV8dJyI/AAAAAAAAAYc/gfmAcT1gs9U/s1600/00EONIA.jpg" height="422" width="640" /></span></a></div>
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<a href="http://2.bp.blogspot.com/-9U3Xx6lrQx0/UvNQe7bWyRI/AAAAAAAAAYk/KgWD0udSfCg/s1600/00HICP.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: Georgia, Times New Roman, serif;"><img border="0" src="http://2.bp.blogspot.com/-9U3Xx6lrQx0/UvNQe7bWyRI/AAAAAAAAAYk/KgWD0udSfCg/s1600/00HICP.jpg" height="434" width="640" /></span></a></div>
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span><span style="font-family: Georgia, Times New Roman, serif;"><a href="http://www.reuters.com/article/2014/02/05/us-ecb-measures-idUSBREA1411X20140205" target="_blank">Reuter's Paul Carrel examines the available policy tools of ECB</a>, but which one would be the most probable? The board will surprise me (a lot) if they decide to suspend Sterilization operations and to proceed to aggressive QE, which are rather unconventional. The other three policy responses, namely forward guidance, cutting rate (currently at 0.75%) and LTROs at low rate are much more likely (and convnetional) to happen. P. Carrel also mentions negative deposit facility rate; an innovation. So, no marvel for now! (I might be wrong though, <a href="http://ecoplusnomics.blogspot.gr/2013/12/tapering-or-not-tapering.html" target="_blank">as previously</a> - do not bet any money!!!!)</span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">Apart from interbank lending which will become cheaper and somewhat less volatile upon today's most probable monetary policy decisions, commercial and consumer lending shall not be facilitated at all. Here is one reason why. If you were a banker, would you lend me more, because you would have low-cost access to liquidity or because you are expecting me to pay you back? What happens if my ability to repay my debts depends on my (expected) future income, which, in turn, depends on my clients' ability to buy my products/services, with the latter depending on their income, and so on? Taking under consideration the recent Eurozone developments - i.e. decreasing investment and retail volume, 0.7% inflation, 12% unemployment - it becomes less and less probable for many households and small and medium sized businesses to maintain their ability to pay off their lenders. So banks avoid lending because of default risk subject to Eurozone outlook, and, perhaps, the pool of solvent entities demanding more lending has drained.</span><br />
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<span style="font-family: Georgia, 'Times New Roman', serif;">So, this is a liquidity trap and monetary policy has no effect, other than on interbank lending. Austerity, goes on... Aggressive QE would be optimal, allowing governments to borrow at low cost, to fuel growth and then start taming their deficits and debts while their economies flourish. Perhaps, some other time and with another ECB mandate! Until then, a farewell to... recovery!</span><br />
<span style="font-family: Georgia, 'Times New Roman', serif;"><br /></span><span style="font-family: Georgia, Times New Roman, serif;">*Source: <a href="http://sdw.ecb.europa.eu/" target="_blank">ECB Statistical Data Warehouse</a></span></div>
Alex Botsishttp://www.blogger.com/profile/14393568466310479846noreply@blogger.com0tag:blogger.com,1999:blog-2322524385069837067.post-4689487906677908462013-12-17T01:52:00.002+02:002013-12-17T02:00:25.129+02:00Tapering or Not Tapering?<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Georgia, Times New Roman, serif;">This week I feel like the entire world is waiting for Ben Bernanke's announcement of the monetary policy decisions. So, is a tapering likely this month?</span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif;">No! I do not think so. Three reasons:</span><br />
<span style="font-family: Georgia, Times New Roman, serif;">[1] Inflation expectation are well anchored (see <a href="http://www.clevelandfed.org/research/data/inflation_expectations/" target="_blank">Cleveland Fed</a>)</span><br />
<span style="font-family: Georgia, Times New Roman, serif;">[2] Inflation is low</span><br />
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<a href="http://2.bp.blogspot.com/-Xw1lpI7FPok/Uq-PhzeX6JI/AAAAAAAAAXk/cnvBJ3UcW00/s1600/USInflation.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://2.bp.blogspot.com/-Xw1lpI7FPok/Uq-PhzeX6JI/AAAAAAAAAXk/cnvBJ3UcW00/s1600/USInflation.png" /></a></div>
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<span style="font-family: Georgia, Times New Roman, serif;">[3] Although unemployment declines, it still can get better.</span><br />
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<a href="http://4.bp.blogspot.com/-YWK7BGxLcKg/Uq-Pv5siYWI/AAAAAAAAAXs/-4cE6Uma-_k/s1600/USunemployment.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://4.bp.blogspot.com/-YWK7BGxLcKg/Uq-Pv5siYWI/AAAAAAAAAXs/-4cE6Uma-_k/s1600/USunemployment.png" /></a></div>
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<span style="font-family: Georgia, Times New Roman, serif;">[4] Real investment growth rate is not that remarkable.</span><br />
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<a href="http://3.bp.blogspot.com/-dhSJW6Icwhs/Uq-QJRGZloI/AAAAAAAAAX0/JtUS6QXgfq8/s1600/realInvestGrowth.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://3.bp.blogspot.com/-dhSJW6Icwhs/Uq-QJRGZloI/AAAAAAAAAX0/JtUS6QXgfq8/s1600/realInvestGrowth.png" /></a></div>
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<span style="font-family: Georgia, Times New Roman, serif;">Overall, </span><span style="font-family: Georgia, 'Times New Roman', serif;">inflation</span><span style="font-family: Georgia, 'Times New Roman', serif;">, i.e. </span><span style="font-family: Georgia, 'Times New Roman', serif;">half of the FED's d</span><span style="font-family: Georgia, 'Times New Roman', serif;">ouble mandate</span><span style="font-family: Georgia, 'Times New Roman', serif;">, is low (perhaps, dangerously low) while </span><span style="font-family: Georgia, 'Times New Roman', serif;">unemployment</span><span style="font-family: Georgia, 'Times New Roman', serif;">, i.e. </span><span style="font-family: Georgia, 'Times New Roman', serif;">the other half</span><span style="font-family: Georgia, 'Times New Roman', serif;">, remains high and declines dully. That is to say there is no reason for tapering now</span></div>
Alex Botsishttp://www.blogger.com/profile/14393568466310479846noreply@blogger.com0tag:blogger.com,1999:blog-2322524385069837067.post-70781993765077835062013-11-28T12:22:00.000+02:002013-11-28T12:22:59.970+02:00Two Advocacies<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Georgia, 'Times New Roman', serif;">In my last post, "<a href="http://ecoplusnomics.blogspot.gr/2013/11/an-advocacy.html" target="_blank">An Advocacy</a>", I pointed out two facts about modern economics and financial markets in an attempt to defend them both. The following two posts become more explicit in indentifying exactly who particularly should be blamed as opposed to generally accusing the Economists as a whole. </span><br />
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</span> <span style="font-family: Georgia, 'Times New Roman', serif;">The first one by </span><span style="font-family: Georgia, Times New Roman, serif;">Simon Wren-Lewis and the second one by Paul Krugman. Enjoy!</span><span style="font-family: Georgia, 'Times New Roman', serif;"> </span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">[1] <a href="http://mainlymacro.blogspot.gr/2013/11/attacks-on-mainstream-economics-and.html" target="_blank">mainly macro: Attacks on mainstream economics and reforming </a></span><span style="font-family: Georgia, Times New Roman, serif;"><a href="http://mainlymacro.blogspot.gr/2013/11/attacks-on-mainstream-economics-and.html" target="_blank">economics teaching</a></span><span style="font-family: Georgia, 'Times New Roman', serif;">: Mainstream (orthodox) economics is having a hard time in the pages of the Guardian. First Aditya Chakrabortty writes “ How do elites remain in charge?...</span><br />
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</span> <span style="font-family: Georgia, Times New Roman, serif;">[2] <a href="http://krugman.blogs.nytimes.com/2013/11/27/the-trouble-with-economics-is-economists/?_r=0" target="_blank">The Consience of a Liberal: </a></span><span style="background-color: white; font-family: Georgia, 'Times New Roman', serif; line-height: 1.083em;"><a href="http://krugman.blogs.nytimes.com/2013/11/27/the-trouble-with-economics-is-economists/?_r=0" target="_blank">The Trouble With Economics Is Economists</a>: "</span><span style="font-family: Georgia, Times New Roman, serif;"><span style="background-color: white; line-height: 1.5em;">That’s in large part what Simon Wren-Lewis is saying in this post </span><span style="background-color: white; line-height: 1.5em;">defending mainstream economics. And I largely agree. </span></span><span style="background-color: white; font-family: Georgia, 'Times New Roman', serif; line-height: 1.5em;">It is deeply unfair to blame textbook economics either for the crisis or for the poor response to the crisis. The mania for financial deregulation...</span><br />
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<span style="background-color: white; font-family: Georgia, 'Times New Roman', serif; line-height: 1.5em;">Conclusions are yours. Mistakes and misstatements are all mine.</span></div>
Alex Botsishttp://www.blogger.com/profile/14393568466310479846noreply@blogger.com0tag:blogger.com,1999:blog-2322524385069837067.post-77156874342934825772013-11-26T17:15:00.002+02:002013-11-26T19:07:01.825+02:00An advocacy<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-family: Georgia, Times New Roman, serif;">I have been following a few MOOCs in coursera.org for the last few months, and I have observed something really bleak. Two courses by Prof. Mehrling (</span><a href="https://www.coursera.org/courses?orderby=upcoming&search=mehrling" style="font-family: Georgia, 'Times New Roman', serif;" target="_blank">here</a><span style="font-family: Georgia, Times New Roman, serif;">) in Coursera examine an alternative approach to the origins of the 2007-2008 turmoil, which has been rather enlightening. A lot of ardent discussions have taken place in these courses' forum; discussions, and some comments in them, that, more or less, accuse economists and financial markets of the current state of affairs. I do not blame these critiques... Yet, I admit they leave a dismal feeling. Mistakes have been made, but economists are not gods; none of us is. I will not argue for who should be blamed, either (I have done so, already). There are only two remarks I would humbly like to make. </span></div>
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<span style="font-family: Georgia, Times New Roman, serif;">First of all, in addition to blaming economists one has to appreciate their contribution before the global financial crisis. Hitherto, they had conduced to successfully alleviating the effects of business cycles in our income, and, hence, in our lives. If you check the following graph you may see what I mean. Although, there is a lot of dissonance in economics, since John Maynard Keyne's time in 1929-1932 until 2007, none of the recessions was that catastrophic. Did that happen by accident? I believe not! Was it the invisible hand? No!!! It was the Invisible... Economist! Economics (such as, the Mundel-Fleming model, and Keynes' Theory) were guiding the stabilization policies during all this time. So, economists should be blamed for what is happening now, and, certainly, not all of them; but while scrutinizing Economics, please pay attention to both their virtues and their sins.</span></div>
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<span style="font-family: Georgia, Times New Roman, serif;">Secondly, we have to distinguish financial markets and instruments from the people that operate in and with them. The former offers a great variety of hedging and funding instruments that have proven to be indispensable for the development of modern economies. How could an exporter, for instance, find indemnity against devaluation of his home currency against that of his oversees partner without a derivative in foreign exchange? How could an investor protect his savings against price fluctuations without derivatives? How could a firm pay his workers now, while expecting revenue from its sales a few months later without a bank loan? The answer is simple: there is no alternative. </span><span style="font-family: Georgia, 'Times New Roman', serif;">But, who takes the other side of the derivatives transactions? Most likely, a speculator, but, again, there is no alternative. Similarly, we need the banks. </span><br />
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<span style="font-family: Georgia, 'Times New Roman', serif;">Obviously, the market institutions are not only essential (unless, of course, we move on to Socialism, which is impossible, for now), but utterly beneficial, as well. On the contrary, the individuals operating in these institutions may misuse the market instruments, perhaps by gluttony or greed. Is that the financial markets' fault? Take a rock, for example: one can use it to build, while another can use it to smash one other's head. It is not the rock to blame. If you argue that without the rock the killer could not have killed, please, try to think a alternative building material that could not be used in killing... Therefore, if we separate the actors from the instruments we can clearly see who has to be blamed. Accordingly, a safe-net should not serve to protect the public against markets, per se. Instead, a safe-net must guard citizens against the misapplications of the market participants. </span></div>
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<span style="font-family: Georgia, Times New Roman, serif;">Overall, it is crucial to separate the markets from their, perhaps greedy, agents, and to take under consideration both the merits and the demerits of the Science of Economics. Admitedly, the coursera MOOCs' discussion forums do not represent an adequate sample to assess wheter a larger fraction of public has became incredulous to Economics scientists, but, given how things have evolved over the last five or six years, that might be sadly a fact...</span></div>
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<span style="font-family: Georgia, Times New Roman, serif;">(In my defence, the first remark -second paragraph - was initially made in a post graduate Stochastic Calculus lecture by a non-economist, non-finance professional, and mathematician J. Spiliotis. Errors, naturally, mine!)</span></div>
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Alex Botsishttp://www.blogger.com/profile/14393568466310479846noreply@blogger.com0tag:blogger.com,1999:blog-2322524385069837067.post-43339232500933449782013-10-22T02:02:00.001+03:002013-10-22T03:00:16.793+03:00Populists: Disuniting united!<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Georgia, Times New Roman, serif;">"Populist" parties, such as the euro-sceptics, euro-critiques and euro-implacable-foes, are likely to form a coalition for the EU Parliamentary elections of May 2013. You can guess why, I presume. They are rallying their troops in order to hinder - if not to demolish - the European integration. And the oxymoron: the "populists" unite to halt European Union. I was casually browsing news websites when the <a href="http://www.ft.com/intl/cms/s/0/ad0d6aee-31ad-11e3-817c-00144feab7de.html?siteedition=intl#slide0" target="_blank">"Europe: United by hostility"</a>, by Joshua Chaffin of FT, drew my attention. It</span><span style="font-family: Georgia, 'Times New Roman', serif;"> that was a bolt from the blue! </span><span style="font-family: Georgia, 'Times New Roman', serif;">In Greece, media have not yet covered this issue at all, at least to my attention. </span><span style="font-family: Georgia, Times New Roman, serif;">I had earlier read a less dismal essay, <a href="http://www.ft.com/intl/cms/s/0/eb265a64-3a42-11e3-b234-00144feab7de.html#axzz2iOTsMZW5" target="_blank">"Watch out for the rise of a European Tea Party"</a>, by Gideon Rachman, again of FT; but I was not that concerned. </span><span style="font-family: Georgia, 'Times New Roman', serif;">Joshua Chaffin initially unveiled the oxymoron: "</span><span style="font-family: Georgia, Times New Roman, serif;">While the group [the European Alliance for Freedom, a "populist" alliance]</span><span style="font-family: Georgia, 'Times New Roman', serif;"> opposes the EU, its principled stance has not prevented it from accepting more than €300,000 in EU funding."</span><br />
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<span style="font-family: Georgia, 'Times New Roman', serif;">Both articles are most insightful and informative. </span><span style="font-family: Georgia, Times New Roman, serif;">The former really terrified me... The latter justifies my horror (remember, that the Tea Party is a minority in Congress that induced the shut-down of the US government). </span><span style="font-family: Georgia, 'Times New Roman', serif;">In addition to terror, after reading the two articles left me with a feeling that the attention of our leaders is drawn to the wrong direction!</span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">The point is that if we want to adequately address the voices inimical to euro we have to identify the facts that underlay their ascent. The facts are austerity in the periphery, on the one-hand; tax-funded bail-outs of the Euro-core, on the other. Poverty and unemployment are the consequences of the prolonged austerity, and only someone inept would doubt that. Similarly, core member countries' tax payers are fed up with financing the prodigal south. Once, it was Greece, for example, being presented as the counter example during pompous political speeches. Now, the fact that Spain, France and Italy are being pushed, in public, to implement austerity, invigorates expectations of more bail-outs. Therefore, all European citizens have incentives to vote to condemn the Eurozone.</span></div>
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<span style="font-family: Georgia, Times New Roman, serif;">A less inept argument in favour of austerity would be that competitiveness has been achieved and many more. However, there is only one truth: when you are impoverished you trust the plan that says "quit euro and that's the end of your misery", instead of the plan that says "be more patient and growth will come". That is not to say that the diction of pro-Europeans must be altered. Not at all. </span></div>
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<span style="font-family: Georgia, Times New Roman, serif;">Uniting against the uniting disuniters is not a plan either. This is not a proper course of action because what underlays the rise of the "populists" is not a not inadequate adherence. But, instead, it is the fanatical adherence to austerity, because that is what creates poverty and unemployment, and that is what makes tax-payers fund the ailing North. </span></div>
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<span style="font-family: Georgia, Times New Roman, serif;">The creation of the EMU is monumental, regardless its defects. We evaded its resolution and we are close enough to face yet another challenge, once more from the inside. Unless we re-examine our priorities and our current scheme of actions, then very soon we will have to face the insanity of a Tea Party. And do not fool yourselves by thinking that, ultimately, Eurozone will make it as the US did lately even with the Tea Party existing! Euro does not share the same history as dollar; particularly during the last five years....</span></div>
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Alex Botsishttp://www.blogger.com/profile/14393568466310479846noreply@blogger.com0tag:blogger.com,1999:blog-2322524385069837067.post-34254691147976056732013-10-14T15:19:00.001+03:002013-10-14T15:19:57.735+03:00US Fiscal Deadlock: Is a default probable?<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Georgia, Times New Roman, serif;">NOT AT ALL!!! </span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">There is conspicuous concern about the aftermath of the current fiscal impasse in the US. Debt ceiling has to be increased by the Congress by the end of October 17th, and there is a budget that needs to be passed by the house and whose delay resulted the government shut-down, with Obamacare being the bone of contention. (I must I have got it right...)</span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">Large market players and the IMF are warning of the consequences of any delay in the payout of federal government's liabilities. What is the probability of such a delay?</span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">The probability is minuscule! First of all, the US economy is the largest one and its political leaders will not sacrifice its prevailing status for any dispute. No matter how stubborn any of the two sides might be, nor the Tea Party, nor any Conservative, nor any Democratic will risk the magnitude of their nation whatsoever. Secondly, if the undoing of this Gordian knot exceeds the four-day deadline each side will subsequently have to engage in blaming the other for the consequences the non-resolution, and there is no public relations expert or Guru that can guarantee ex ante the victory in a "warfare of impressions"; it would be much easier for each of the two sides to convince their supporters that they did not take a step back. Ultimately, someone will retreat!</span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">Besides, had Wall Street been anticipating any perturbation in servicing and in rolling over government's debt obligations, market declivity would have been enormous!</span></div>
Alex Botsishttp://www.blogger.com/profile/14393568466310479846noreply@blogger.com0tag:blogger.com,1999:blog-2322524385069837067.post-7978062638407127462013-08-25T18:24:00.000+03:002013-08-25T18:24:43.958+03:00Austerity bitchslap!<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-family: Georgia, Times New Roman, serif;">Just messing around...</span></div>
Alex Botsishttp://www.blogger.com/profile/14393568466310479846noreply@blogger.com0tag:blogger.com,1999:blog-2322524385069837067.post-3208239248295753102013-08-06T05:43:00.000+03:002013-08-06T05:48:27.648+03:00Betting on expectations...<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Georgia, Times New Roman, serif;">It has been a while since the public discourse of the "success story" begun, generating discussions over whether there is some short of success or not and, if yes, to what extent. <a href="http://ecoplusnomics.blogspot.gr/2013/06/the-economics-of-success-story.html" target="_blank">Anyway, I am with those who strongly believe that there is no "success story" at all to talk about</a>. However, there is something that I have failed to pay attention to: the expectations and the way they make the economy - and the world - move. Expectations play a very important role in any economy and, although they do not constitute the main nor the major factor of economic (both financial and non) incidents, they can make scenarios materialize that otherwise would not; mostly through a self-fulfilling prophecy. </span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">What am I trying to suggest? That the only reason why our prime minister might argue for a success (story) is to create the perception that the ongoing reforms have begun bearing fruit and subsequently to form the expectation that economic environment is going to improve. Apparently, he believes that Greek economy only needs the expectation of growth to start recovering like there are no austerity measures dragging economic activity towards contraction. Not only that, but growth is projected by the European Commission to occur during 2014 in Greece and in many other countries running over the austerity rails; a fact that, in combination with publicly arguing that the worst part is over and economic activity is likely to start increasing, nourishes the expectation of growth being imminent. It is like betting on the powerfulness of expectations! </span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">Well...</span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">As a matter of fact, expectations are not that powerful and most certainly cannot be harnessed that easily. Otherwise, Keynes would not had proposed budget deficits in order to fight the animal spirits... </span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">This bet reminds me that of Mr. Trichet who back in 2011 further raised the ECB rate intending, to some extent, to signal that forecasts favour the scenario of growth.</span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">Anyway, <a href="http://www.imf.org/external/pubs/ft/scr/2013/cr13241.pdf" target="_blank">IMF Country Report No. 13/241</a> enlightens us (pp: 35-44). Among many things, the IMF report reveals many aspects - key factors - of the recession in Greece and fails to convince us on how this state of affairs will be reversed next year. This report also foresees growth in 2014 driven by 8.4% increase in investment (gross fixed capital formation).</span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">How can I be sure that these "success story" and imminent-growth things are really an attempt to form expectations of recovery? I am not! Not at all! I just cannot find any other reason why anyone could argue for success while unemployment rate increases more and more. Nor can I see how investment is going to increase that much while the production contraction in all sectors is attributed to diminishing demand, exports are straggling and negative price developments are likely to persist (again <a href="http://www.imf.org/external/pubs/ft/scr/2013/cr13241.pdf" target="_blank">IMF Country Report No. 13/241</a>, pp: 35-44). Needless to say that I also fail to recognise the economic theory lying behind lowering labor cost (supply-side measure) while recognising decreasing demand to be inhibiting private production.</span><br />
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<span style="font-family: Georgia, Times New Roman, serif;"><u>Of course I am <b>not</b> suggesting that there is some short of conspiracy that aims to deceive us or something!</u></span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">Anyway, we will have to wait yet another year to see what happens... But, aren't we lacking the luxury called "time"?</span></div>
Alex Botsishttp://www.blogger.com/profile/14393568466310479846noreply@blogger.com0tag:blogger.com,1999:blog-2322524385069837067.post-42302040880511993752013-07-01T12:44:00.000+03:002013-07-01T12:44:40.944+03:00Surprising news!!! (NOT..)<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Georgia, Times New Roman, serif;">It is a real shock if you live in a parallel universe of your own... (News initially read at <a href="http://www.naftemporiki.gr/" target="_blank">Naftemporiki</a>)</span><br />
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Alex Botsishttp://www.blogger.com/profile/14393568466310479846noreply@blogger.com0tag:blogger.com,1999:blog-2322524385069837067.post-3599003919916698642013-06-23T18:45:00.001+03:002013-08-06T05:43:50.969+03:00The economics of the "success story"<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Georgia, Times New Roman, serif;">There is something I need to admit... I am sick of the so called "success story" and the naive- false and deceitful, if you are as malicious as I am- declarations of the opposition. Here are the facts:</span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">During 2008, Greece produced goods and services of 240 bn euros. During the period April 2012- March 2013 GDP in current prices was 190 bn euros (<a href="http://www.statistics.gr/portal/page/portal/ESYE/BUCKET/A0704/PressReleases/A0704_SEL84_DT_QQ_01_2013_01_P_GR.pdf" target="_blank">EL.STAT</a>.). By the end of March 2013 the debt of the Central Government was 309 bn euros (<a href="http://www.minfin.gr/content-api/f/binaryChannel/minfin/datastore/86/68/e9/8668e9ebb44d3f42efd3f02e4afde4cd8f6e950f/application/pdf/%CE%94%CE%B5%CE%BB%CF%84%CE%AF%CE%BF+%CE%94%CE%B7%CE%BC%CE%BF%CF%83%CE%AF%CE%BF%CF%85+%CE%A7%CF%81%CE%AD%CE%BF%CF%85%CF%82_%CE%9D%CE%BF69.pdf" target="_blank">Ministry of Finance</a>), i.e. 161% of Greek GDP. </span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">Additional measures need to be taken in order to make sure that the Central Government debt will be less than 110% of GDP by 2022. The most auspicious scenario is that the current taxation will remain unchanged for at least until 2015 with the hope that recession will deescalate. Anyway, I do not really believe that there is any more space left for heavier taxation.</span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">On the other hand, we are still missing the big picture: while oscillation between anemic growth and periods of recessions tends to become a long-run condition (2013 minus 2008 equals file years which you cannot call "short-run") we have failed to address the long-run challenges of technology, innovation and competitiveness in the struggling periphery and, to some extent, the main core of the Euro-zone to some extent.</span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">Consequently, there is absolutely no success story to talk about nor any margins for policy reorientation unless the fundamentals of the Euro area are redrawn, i.e. the mandate of the ECB and the policy priorities.</span></div>
Alex Botsishttp://www.blogger.com/profile/14393568466310479846noreply@blogger.com0tag:blogger.com,1999:blog-2322524385069837067.post-72176619237135164012013-04-24T21:30:00.002+03:002013-04-24T21:30:58.557+03:00Euro area: A few alternatives.<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Georgia, Times New Roman, serif;">Many times, the private debates in which I have participated have been fueled by the debt and the banking crisis and the imminent recession. What went so uglily wrong? What should have been done? Is it too late? Can things take a turn for worse? </span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">Firstly, it is essential to unfold the exact chain of events the way I apprehend it based on my knowledge of economic theory. Everything began in 2007-2008 when the financial sector of the US devastating losses following the collapse of both the sub prime lending and its securitization and gradually the rest of the world was infected. After Lehman Brothers everyone realized that there was nothing to end painlessly. In their effort to prevent a broader contamination, governments borrowed large sums in other to strengthen the balance sheet of the banking and financial sector and safeguard their economies. Put differently, tax payers are asked to pay for a risk they never undertake and for which they never compensated. Nations with weaker financial and banking sector were forced to borrow yet heavily while nations that had </span><span style="font-family: Georgia, 'Times New Roman', serif;">already</span><span style="font-family: Georgia, 'Times New Roman', serif;"> </span><span style="font-family: Georgia, 'Times New Roman', serif;">accumulated debt (preceding 2008) end up borrowing at an unsustainable high interest rate. Thereafter, austerity emerged as the most efficient way to address the over-indebtness with unemployment and recession being the price. The recession that was due to the austerity measures implemented in northern Europe, and to several other nations, will most likely propagate to the rest of the Euro area and then to the US and gradually to the rest of the western economies. </span><br />
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<span style="font-family: Georgia, 'Times New Roman', serif;">Economies are highly interconnected. The demand of any given area determines the supply of other areas too, i.e exports. Economic agents being aware of this interconnection are more likely to expect the income to diminish and they will subsequently reduce their demand. </span><span style="font-family: Georgia, 'Times New Roman', serif;">he E</span><span style="font-family: Georgia, 'Times New Roman', serif;">xports of other countries fall alongside the internal</span><span style="font-family: Georgia, 'Times New Roman', serif;"> absorption of their trade partners and the recession disseminates.</span><br />
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<span style="font-family: Georgia, 'Times New Roman', serif;">So, yes! Economies are about to perform much worse... Debt will then become the least of our concerns.</span><br />
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<span style="font-family: Georgia, 'Times New Roman', serif;">It has been for a long time my belief that the weaknesses of the financial and the banking sector must had and must always be addressed by the Central Banks. The reason is as simple as this: Central "Banks"! In addition, that is the only way to prevent the transformation of financial losses into public debt due by taxpayers. A Central Bank has technical knowledge and unbounded means necessary to safeguard the financial entities subject to its superintendence. Here is the plan: the Central Bank finances the equity capital increase indispensable for the bank to comply with the regulation, obtaining common stock in exchange and taking over the administration of that given bank. The loss of the rest of the share holders' suffrage and the forfeiture of administration serve as disincentives to undertake excessive risk and hence as a remedy for moral hazard. Moreover, while being in charge, the Central Bank may prevent further credit expansion, risk exposure and enlargement of the position after the amelioration of liquidity and hence may halt excessive expansion of monetary aggregates and financial market booms. Alternatively, the liquidity injected as a result of this form of bail out can be absorbed by selling the government debt the central bank disposes or by raising reserves requirements. The former risks increasing the borrowing cost of the member states but the latter has no large side effects whatsoever, yet it affects all the banks. Therefore, limiting the credit provision up to the needed extent remains the most viable <i>sterilization tool</i>.</span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">All the aforementioned, could be a form of response to the 2008 challenges, the Cyprus banking crisis and to other similar crunches that may appear in the future. The scheme under which the Central bank can intervene in that way is subject to many alterations, but the financing of the balance sheets exclusively by the monetary authority is the key. For instance, ESM can be entirely financed by ECB with the latter providing unlimited funding to the former.</span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">Please note, that obligating tax payers to cover the financial losses is like proceeding to a haircut of their savings. The present value of the future additional tax is equal to the bail out amounts needed since the rate under which government borrowing occurred is what will determine the tax increase in the future; e.g. the government will collect 110€ from taxes in two years for borrowing 100</span><span style="font-family: Georgia, 'Times New Roman', serif;">€ now, hence the taxpayers have to remove </span><span style="font-family: Georgia, 'Times New Roman', serif;">100</span><span style="font-family: Georgia, 'Times New Roman', serif;">€ from their current income in order to have 110</span><span style="font-family: Georgia, 'Times New Roman', serif;">€ two years from now. This short of Ricardian equivalency holds, primarily because the funds allocated for regulatory capital needs have no side-impact on the economic activity outside the financial sector and because future generations will inherit the lower savings of their ancestors.</span><span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span><span style="font-family: Georgia, 'Times New Roman', serif;">If you consider Central Banks' aggressive and extensive intervention to be absurd and unjustified, please take some minutes to think what the adjectival for bank deposits haircut would be...</span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span><span style="font-family: Georgia, Times New Roman, serif;">Moving on to the debt crisis burst in 2009 in the EMU, the alternative would be the funding by the EMU partners of the Keynesian policies of the weaker nations- and the Keynesian tactics for their own economies- and after recovery is achieved increasing- as a result of growth- tax revenues in combination with gradual structural reforms and budget cuts in a 10 year horizon would be a more efficient mix to deal with the debt problem; provided, of course, this problem really exists. A period of 10 years is not long when profound structural adjustment is the issue. And since programme nations are about to enter yet another year, the sixth one, with either no </span><span style="font-family: Georgia, 'Times New Roman', serif;">access at all </span><span style="font-family: Georgia, 'Times New Roman', serif;">or access at a high cost to bond markets we cannot expect to receive any praise at all. On the other hand, recovery would have been strong instead, measures for current account and budget surpluses might have already begun bearing fruits, making debt repayment easier and lowering significantly borrowing cost. Additionally, intervention from the monetary authority to lower the short-term rates would have further broaden the boundaries of the expansionary fiscal policy. </span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">Boosting aggregate demand, stimulates investment and fuels growth. A fiscal multiplier around 1.2-1.5% and tax revenues around 30-40% of GDP (other countries are below 30% and some other above 42%, will yield some 0.4-0.6% of GDP additional tax revenues for every 1% of GDP of budget deficit. The truth is that debt goes up by 0.4-0.6% for every 1% of deficit without taking into account the reduction of the cyclical component of government expenditure.</span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">Last, but not least, t</span><span style="font-family: Georgia, 'Times New Roman', serif;">he institutional role of the ECB and its mandate needs to be altered as soon as possible, and that is a prerequisite if we decide to change our policy orientation at last.</span><br />
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<span style="font-family: Georgia, Times New Roman, serif;">I you are not convinced yet, please consider what is happening at the moment. It is really worth reexamining our policy... Maybe, at the end of the day, the price of our ongoing choices proves to be <i>freaking</i> high! Even worse, fighting debt with more debt and recession really needs to make the taxpayers from the non-programme-countries worry about the possibility of taking their surpluses back...</span></div>
Alex Botsishttp://www.blogger.com/profile/14393568466310479846noreply@blogger.com0tag:blogger.com,1999:blog-2322524385069837067.post-60755608011506718802013-04-24T20:28:00.001+03:002013-04-24T23:24:54.044+03:00It's the animal spirits: some evidence.<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Georgia, 'Times New Roman', serif;">It has been a while, since </span><span style="font-family: Georgia, Times New Roman, serif;">I posted "<a href="http://ecoplusnomics.blogspot.gr/2013/04/its-animal-spirits.html" target="_blank">It's the animal spirits</a>" trying to identify some reasons why the US economy is underachieving in terms of employment and growth. Unfortunately, I was unable to substantiate some of my claims one of which was:</span><br />
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<span style="background-color: white; font-family: Georgia, 'Times New Roman', serif; font-size: 15px; line-height: 20px;">In addition, households curb their optimism for their future income and are intimidated to spend; either they cannot be confident that they will maintain their current job or the unemployed household members cannot be sure that they will be hired in the near future.</span></blockquote>
<span style="font-family: Georgia, Times New Roman, serif;">David Beckworth on <a href="http://macromarketmusings.blogspot.gr/2013/04/the-ongoing-dereliction-of-duty.html" target="_blank">Macro and Other Market Musings: The Ongoing Dereliction of Duty </a>fortunately provides evidence that actually expected household income plays a vital role in the future course of the US economy. Enjoy his post!</span></div>
Alex Botsishttp://www.blogger.com/profile/14393568466310479846noreply@blogger.com0